Finance

Recession Watch: Are We Learning from the Past and Present?

By Deborah Nayrocker Guest Writer

CBN.com
 This recession and its economic changes have affected all of us in one way or another. Some of us were prepared. Many more of us were hit with the reality we were living beyond our means.

When consumers felt wealthier there was unbalanced spending and irresponsible spending. People were unstoppable in taking shortcuts to happiness and getting what they desired. It was instant gratification – buy now and pay later, with little thought about how they would pay their debts in the future.

Consumers juggled multiple credit cards with no intention of paying them off at the end of each month. Families bought homes with “creative financing” and with no money down. Risky loans and deals were made. With less income coming in, the shortcuts to happiness have turned into shortcuts to misery. Rising numbers of layoffs have hit many Americans. Communities and businesses, large and small, have become painfully aware of the economic recession.

A lesson many people learned from an earlier major recession was that cash is king. In 1984, immediately after America’s last recession, the savings rate was 11 percent. Americans are now slowly increasing their savings rate, from a negative rate in 2007 to 5 percent in 2009. Families and businesses are discovering the importance of building a safety net.

History shows us economies are cyclical. There is a pattern of recession then recovery, recession then recovery for years. There is great expansion, then contraction. The bigger the boom, the bigger the bust.

Economist Martin Weiss states in Money and Markets that this recession “is not the typical 20th century recession. [It] is the probable consequence of a great housing bust, a massive mortgage meltdown and the biggest financial crisis in history … It challenges the smartest minds in Washington, defies the deepest pockets on Wall Street and threatens to rip through our life with the force of a Cat-5 hurricane.”

Since World War II, the average recession lasted about 11 months. The present major economic downturn has surpassed the record of the longest recession to date. (It was in 1981-82, lasting 16 months, according to The Wall Street Journal). This recession has lasted 22 months so far.

Job Losses

What sets this recession apart from the others is the pace of job losses. The rate of unemployment has been faster than in the past five recessions. People are watching their companies and productivity shrink. Unemployment has gone up in every state.

The unemployment rate tops 10 percent, with 16 million people looking for full-time jobs. Counting those who stopped looking for work or who have taken part-time jobs, the rate has risen to 17.5 percent.

Louis Uchitelle explained how this recession is different from the last major downturn of 1981-1983 in Washington Journal. Although unemployment was above 10 percent in the early 1980s, the banks were in good shape. The government managed interest rates to fight inflation. Rates were higher for 18 months, then lowered. There wasn’t a widespread pulling back by consumers.

Uchitelle reports that in this recession there’s a credit crisis. Banks have decreased lending considerably. Businesses and consumers are discovering that access to credit is not as easy as it used to be. People aren’t buying as they did. The economy has been shrinking, leading to low productivity, and causing rapid unemployment. It will take awhile to get back to full capacity of productive services. Uchitelle states that it may take up to four years before a recovery.

America’s Credit Problem

The U.S. is at record levels of debt nationally, with trillions of dollars in deficits. The
No. 1 personal finance challenge today is getting out of debt. Many people have been habitually living on more than they earn. They have been turning to easy credit to make up the difference. Millions of Americans have nearly a trillion dollars of high-interest credit card debt.

Many Americans have more debt than savings. A recent credit card poll found that 76 million Americans have no savings. In 2007 there was a negative savings rate. This recession is hitting people especially hard who have little or no savings.

Brighter Days Ahead

Economic signs indicate the recovery will be sluggish. The process of de-leveraging will take awhile. Jobless rates will drop slowly.

In the meantime, families can look at some benefits of this downtrend.

1. More consumer buying power – Lower prices make purchases more affordable for big-ticket and durable items. Stores and services are cutting prices to attract and keep customers.

2. Housing affordability – Houses are more affordable now than at any time in the past 20 years, according to the National Association of Home Builders.

3. Lower mortgage rates – Rates are at historical lows, partly because of the Federal Reserve’s purchases of mortgage-backed securities.

This economic downturn has triggered the need for families to get a better grasp of their money management skills. Many families have learned they can’t take anything for granted.

In my book, The Art of Debt-Free Living, I give many examples of how Americans don’t plan ahead and get into trouble. I also show how they can be successful financially and break the habit of poor financial decisions.

This is a perfect time to redefine our goals and to review our priorities for a better future. We can focus on what we can control and on things we can change. A very important first step is to pay off consumer debt and grow emergency savings.

Deborah Nayrocker is an award-winning writer and personal finance columnist. She is the author of The Art of Debt-Free Living and a popular Bible study Living a Balanced Financial Life. Her Web site is www.artofdebt-freeliving.com.